- J.C. Penney earnings have just crushed expectations of even the wildest bull.
- Most market participants are either short JCP or underweight.
- The sell-side got caught flat footed and will have to upgrade.
I hate to gloat, but I warned the bears. Low expectations, plenty of liquidity and lapping very easy comps due to the RJ/Ackman fiasco and the closing of the home store. J.C. Penney (NYSE:JCP) crushed even my most bullish expectations. 6.4% comps in a quarter where Macy's (NYSE:M) and Kohl's (NYSE:KSS) were negative! SGA well under control still, though a little higher than I would like. Gross margins right on street expectations of 33%. The Company is guiding to free cash flow break even on the year. I believe it will beat its annual guidance, perhaps by a lot.
From a valuation standpoint here is what this all means. I believe that JCP will eventually get back to $1-2 billion of EBITDA and it will trade at about 6x that number. I really believe in the high end of that range, and these past two quarters are accelerating my thinking. Taking the average of the seasonal high and low debt amounts yields about $3.7 billion of net debt (you can use higher or lower numbers but this is directionally correct), If you use a range of $1.5-2 billion of EBITDA and a 6x multiple, the stock is worth between $17-27 per share. I will take the midpoint and give an overly precise target of $22 a share. I believe that as this turnaround takes hold, the market will begin to price these numbers in some time this year. In the short term, the stock should trade in the $10-12 range. However, the stock has a tendency to overshoot on valuation, both to the upside and the downside. It should never have traded in the $5-6 range. After hours, the stock is trading at $10 and was briefly in the mid-$10 range.
The sell-side is caught flat footed. Of the 29 analysts that follow the stock according to Bloomberg, only 4 have buys on the stock. Many were burned on the way down and by the offering at $9.65. They now look like they have missed one of the best turnaround stories in retail. They should have upgraded after last quarter. They will now have to upgrade the stock even if it's just to neutral. JCP was kicked out of the S&P 500, anyone competing with the S&P will be looking to add some alpha with a turnaround story. Retail sector fund will have to add it or risk underperforming. Short credit and retail hedge funds will have to cover as it is not going to zero and they are about to get squeezed. The 5 yr. CDS just dropped 8 points in a matter of minutes. The debt market is saying that there is no bankruptcy. The Company just massively upsized its credit facility, so much for the bear thesis that no credit was available to the Company. The bearish sell siders like Gilbert at Imperial with a target that oscillates wildly but implies Chapter 11 ($1-2.5 a share) will have to up targets and ratings. To top it all off, the stock sold off hard into earnings one the weak market and weak results from KSS, M and WMT. JCP is massively outperforming and its is still cheap. Cover while you still can. Giddy Up. To infinity and beyond! Or at least $22. I win and the shorts lose.
Additional disclosure: Positions can and do change at anytime without warning or notice.